GOME ELECTRICAL APPLIANCES : COMPETING FOR CHANNEL LEADERSHIP
Parties involved in case:
Gome – Leading specialized home appliance chain Vs The Color Television Price Alliance (9 core members including Konka, TCL, Hisense, Skyworth, Prima, Rowa, LG, Panda and Westlake)
The color television manufactures have joined hands to form an alliance and decided to control the prices of the color television in the China market. The purpose of this alliance is to stop any further price wars that might happen in the market and thus recapture the channel leadership from the sales agent. This strategy was working against Gome’s business model where it used to focus on thin margins and high volumes. Due to the high volumes, Gome could always negotiate a higher rebate from manufacturers which it used to pass on to its customers; thus being cheaper than competition and further pushing its sales volumes. This model was working very well for Gome as it was like a continuous loop, but with the alliance fixing the price it was a direct threat to Gome business strategy as they would no longer be able to push for higher rebate from manufactures and thus lose their edge over the competition.
Background of China’s Home Appliance Market:
China’s electrical appliances industry had developed rapidly during the 1980s but lately had experienced a phase of slow growth in the 1990s. The market had also changed from a seller market to a buyer market. In 1999, the gross value of the China’s home appliance production had exceeded RMB 150 billion, with the number of domestic enterprises reaching 2,675. Also demand in the big cities was approaching saturation; though rural market had great potential, it was not well developed. This led to fierce competition among the home appliance enterprises leading to price wars. As a result, the entire industry entered a phase of low profit margin.
Evolution of Home Appliance Sales Channels:
Emerging Model of Sales Channel
a. Many comprehensive retail chain stores were set up by foreign chain retail giants such as Wal-mart, Carrefour and Metro; but their focus was not on home appliances business.
b. A large number of chain retail stores specializing in the sales of home appliances were opened up. Major players like Gome, Shandong Sanlian, Suning Electrical Appliances, Beijing Daizhong and Shanghai Yongle were developing rapidly during 1990s with an increasing market influence and growing market share in the home appliances market every year.
Initially the Chinese home appliances consumers behaved like a typical buyer’s market consumer where they concentrated purely on the price of the product and would wait for a better and cheaper deal to be introduced in the market. As soon, a price cut or any promotion would be announcement consumers would rush in to make their purchases. But over time, the consumption behavior gradually became rational and mature where they would pay more attention to the product quality and after sales service; price factor was becoming less influential.
Over period of time an interesting consumption pattern was observed that consumers started buying when the prices were rising, but not when the prices were falling; the rationale behind this was that consumers started to believe that anything that is cheap cannot be good.
SWOT Analysis of GOME
• GOME is an established player since 1996 in the national retail chain selling various types of home appliances.
• GOME is not only strong among the domestic products but has been a strong player of foreign brand retailing too. GOME has long term relationship and support of foreign players like Sony, Panasonic, Toshiba, Sharp, etc.
• Low cost on the basis of economies of scale, high bargaining power with manufacturers, centralized purchasing, decentralized sales and direct...